Economic Methodology: Thinking Math Can Substitute for Economics Turns Economists Into Real Morons Department


The highly estimable Tim Taylor wrote:

Tim Taylor: Some Thoughts About Economic Exposition in Math and Words: “[Paul Romer’s] notion that math is ‘both more precise and more opaque’ than words is an insight worth keeping…”

And he recommends Alfred Marshall’s workflow checklist:

  1. Use mathematics as a shorthand language; rather than as an engine of inquiry.
  2. Keep to them till you have done.
  3. Translate into English.
  4. Then illustrate by examples that are important in real life.
  5. Burn the mathematics.
  6. If you can’t succeed in 4, burn 3.

This is sage advice.

And to underscore the importance of this advice, I think it is time to hoist the best example I have seen in a while of people with no knowledge of the economics and no control over their models using—simple—math to be idiots: Per Krusell and Tony Smith trying and failing to criticize Thomas Piketty.

(2015) The Theory of Growth and Inequality: Piketty, Zucman, Krusell, Smith, and “Mathiness”: It is Krusell and Smith (2014) that suffers from “mathiness”–people not in control of their models deploying algebra untethered to the real world in a manner that approaches gibberish.

I wrote about this last summer, several times:

  • Department of “Huh?!”–I Don’t Understand More and More of Piketty’s Critics: Per Krusell and Tony Smith
  • The Daily Piketty: Ryan Avent on Housing in the Twenty-First Century: Wednesday Focus for June 18, 2014
  • In Which I Continue to Fail to Understand Why Critics of Piketty Say What They Say: (Late) Friday Focus for June 6, 2014
  • Depreciation Rates on Wealth in Thomas Piketty’s Database

This time, [it was a] reply… to Paul Romer… with a Tweetstorm. Here it is, collected, with paragraphs added and redundancy deleted:

My objection to Krusell and Smith (2014) was that it seemed to me to suffer much more from what you call “mathiness” than does Piketty or Piketty and Zucman. Recall that Krusell and Smith began by saying that they:

do not quite recognize… k/y=s/g…

But k/y=s/g is Harrod (1939) and Domar (1946). How can they fail to recognize it? And then their calibration–n+g=.02, δ=.10–not only fails to acknowledge Piketty’s estimates of economy-wide depreciation rate as between .01 and .02, but leads to absolutely absurd results:

  • For a country with a K/Y=4, δ=.10 -> depreciation is 40% of gross output.
  • For a country like Belle Époque France with a K/Y=7, δ=.10 -> depreciation is 70% of gross output….

Krusell and Smith had no control whatsoever over the calibration of their model at all. Note that I am working from notes here, because no longer points to Krusell and Smith (2014). It points, instead, to Krusell and Smith (2015), a revised version. In the revised version, the calibration differs. It differs in:

  • raising (n+g) from .02 to .03,
  • lowering δ from .10 or .05 (still more than twice Piketty’s historical estimates), and
  • changing the claim that as n+g->0 K/Y increases “only very marginally” to the claim that it increases “only modestly”. The right thing to do, of course, would be to take economy-wide δ=.02 and say that k/y increases “substantially”.)

If Krusell and Smith (2015) offer any reference to Piketty’s historical depreciation estimates, I missed it. If it offers any explanation of why they decided to raise their calibration of n+g when they lowered their δ, I missed that too.

Piketty has flaws, but it does not seem to me that working in a net rather than a gross production function framework is one of them.

And Krusell and Smith’s continued attempts to demonstrate otherwise seem to me to suffer from “mathiness” to a high degree.

Here are the earlier pieces:

DEPARTMENT OF “HUH?!”–I DON’T UNDERSTAND MORE AND MORE OF PIKETTY’S CRITICS: PER KRUSELL AND TONY SMITH: As time passes, it seems to me that a larger and larger fraction of Piketty’s critics are making arguments that really make no sense at all–that I really do not understand how people can believe them, or why anybody would think that anybody else would believe them. Today we have Per Krusell and Tony Smith assuming that the economy-wide capital depreciation rate δ is not 0.03 or 0.05 but 0.1–and it does make a huge difference…

Per Krusell and Tony Smith: Piketty’s ‘Second Law of Capitalism’ vs. standard macro theory: “Piketty’s forecast does not rest primarily on an extrapolation of recent trends…

…[which] is what one might have expected, given that so much of the book is devoted to digging up and displaying reliable time series…. Piketty’s forecast rests primarily on economic theory. We take issue…. Two ‘fundamental laws’, as Piketty dubs them… asserts that K/Y will, in the long run, equal s[net]/g…. Piketty… argues… s[net]/g… will rise rapidly in the future…. Neither the textbook Solow model nor a ‘microfounded’ model of growth predicts anything like the drama implied by Piketty’s theory…. Theory suggests that the wealth–income ratio would increase only modestly as growth falls…

And if we go looking for why they believe that “theory suggests that the wealth–income ratio would increase only modestly as growth falls”, we find:

Per Krusell and Tony Smith: Is Piketty’s “Second Law of Capitalism” Fundamental? : “In the textbook model…

…the capital- to-income ratio is not s[net]/g but rather s[gross]/(g+δ), where δ is the rate at which capital depreciates. With the textbook formula, growth approaching zero would increase the capital-output ratio but only very marginally; when growth falls all the way to zero, the denominator would not go to zero but instead would go from, say 0.12–with g around 0.02 and δ=0.1 as reasonable estimates–to 0.1.

But with an economy-wide capital output ratio of 4-6 and a depreciation rate of 0.1, total depreciation–the gap between NDP and GDP–is not its actual 15% of GDP, but rather 40%-60% of GDP. If the actual depreciation rate were what Krussall and Smith say it is, fully half of our economy would be focused on replacing worn-out capital.

It isn’t:


That makes no sense at all.

For the entire economy, one picks a depreciation rate of 0.02 or 0.03 or 0.05, rather than 0.10.

I cannot understand how anybody who has ever looked at the NIPA, or thought about what our capital stock is made of, would ever get the idea that the economy-wide depreciation rate δ=0.1.

And if you did think that for an instant, you would then recognize that you have just committed yourself to the belief that NDP is only half of GDP, and nobody thinks that–except Krusall and Smith. Why do they think that? Where did their δ=0.1 estimate come from? Why didn’t they immediately recognize that that deprecation estimate was in error, and correct it?

Why would anyone imagine that any growth model should ever be calibrated to such an extraordinarily high depreciation rate?

And why, when Krusell and Smith snark:

we do not quite recognize [Piketty’s] second law K/Y = s/g. Did we miss something quite fundamental[?]… The capital-income ratio is not s/g but rather s/(g+δ) no reference to Piketty’s own explication of s/(n+δ), where δ is the rate at which capital depreciates…

do they imply that this is a point that Piketty has missed, rather than a point that Piketty explicitly discusses at Kindle location 10674?

?One can also write the law β=s/g with s standing for the total [gross] rather than the net rate of saving. In that case the law becomes β=s/(g+δ) (where δ now stands for the rate of depreciation of capital expressed as a percentage of the capital stock)…

I mean, when the thing you are snarking at Piketty for missing is in the book, shouldn’t you tell your readers that it is explicitly in the book rather than allowing them to believe that it is not?

I really do not understand what is going on here at all…

In Which I Continue to Fail to Understand Why Critics of Piketty Say What They Say: “Per Krusell II: So I wrote this on Friday, and put it aside because I feared that it might be intemperate, and I do not want to post intemperate things in this space.

Today, Sunday, I cannot see a thing I want to change–save that I am, once again, disappointed by the quality of critics of Piketty: please step up your game, people!

In response to my Department of “Huh?!”–I Don’t Understand More and More of Piketty’s Critics: Per Krusell and Tony Smith, Per Krusell unfortunately writes:

Brad DeLong has written an aggressive answer to our short note…. Worry about increasing inequality… is no excuse for [Thomas Piketty’s] using inadequate methodology or misleading arguments…. We provided an example calculation where we assigned values to parameters—among them the rate of depreciation. DeLong’s main point is that the [10%] rate we are using is too high…. Our main quantitative points are robust to rates that are considerably lower…. DeLong’s main point is a detail in an example aimed mainly, it seems, at discrediting us by making us look like incompetent macroeconomists. He does not even comment on our main point; maybe he hopes that his point about the depreciation rate will draw attention away from the main point. Too bad if that happens, but what can we do…

Let me assure one and all that I focused–and focus–on the depreciation assumption because it is an important and central assumption. It plays a very large role in whether reductions in trend real GDP growth rates (and shifts in the incentive to save driven by shifts in tax regimes, revolutionary confiscation probabilities, and war) can plausibly drive large shifts in wealth-to-annual-income ratios. The intention is not to distract with inessentials. The attention is to focus attention on what is a key factor, as is well-understood by anyone who has control over their use of the Solow growth model.

Consider the Solow growth model Krusell and Smith deploy, calibrated to what Piketty thinks of as typical values for the 1914-80 Social Democratic Era: a population trend growth rate n=1%/yr, a labor-productivity trend growth rate g=2%/yr, W/Y=3.

Adding in the totally ludicrous Krusell-Smith depreciation assumption of 10%/yr means (always assuming I have not made any arithmetic errors) that a fall in n+g from 3%/yr to 1%/yr, holding the gross savings rate constant, generates a rise in the steady-state wealth-to-annual-net-income ratio from 3 to 3.75–not a very big jump for a very large shift in economic growth: the total rate of growth n+g has fallen by 2/3, but W/Y has only jumped by a quarter.

Adopting a less ludicrously-awry “Piketty” depreciation assumption of 3%/yr generates quantitatively (and qualitatively!) different results: a rise in the steady-state wealth-to-annual-net-income ratio from 3 to 4.708–the channel is more than twice has powerful.


We have a very large drop in Piketty’s calculations of northwest European economy-wide wealth-to-annual-net-income ratios from the Belle Époque Era that ended in 1914 to the Social Democratic Era of 1914-1980 to account for. How would we account for this other than by (a) reduced incentives for wealthholders to save and reinvest and (b) shifts in trend rates of population and labor-productivity growth? We are now in a new era, with rising wealth-to-annual-net-income ratios. We would like to be able to forecast how far W/Y will rise given the expected evolution of demography and technology and given expectations about incentives for wealthholders to save and reinvest.

How do Krusell and Smith aid us in our quest to do that?

Depreciation Rates on Wealth in Thomas Piketty’s Database:: Thomas Piketty emails:

We do provide long run series on capital depreciation in the “Capital Is Back” paper with Gabriel [Zucman] (see, appendix country tables US.8, JP.8, etc.). The series are imperfect and incomplete, but they show that in pretty much every country capital depreciation has risen from 5-8% of GDP in the 19th century and early 20th century to 10-13% of GDP in the late 20th and early 21st centuries, i.e. from about 1%[/year] of capital stock to about 2%[/year].

Of course there are huge variations across industries and across assets, and depreciation rates could be a lot higher in some sectors. Same thing for capital intensity.

The problem with taking away the housing sector (a particularly capital-intensive sector) from the aggregate capital stock is that once you start to do that it’s not clear where to stop (e.g., energy is another capital intensive sector). So we prefer to start from an aggregate macro perspective (including housing). Here it is clear that 10% or 5% depreciation rates do not make sense.

No, James Hamilton, it is not the case that the fact that “rates of 10-20%[/year] are quite common for most forms of producers’ machinery and equipment” means that 10%/year is a reasonable depreciation rate for the economy as a whole–and especially not for Piketty’s concept of wealth, which is much broader than simply produced means of production.

No, Pers Krusell and Anthony Smith, the fact that:

[you] conducted a quick survey among macroeconomists at the London School of Economics, where Tony and I happen to be right now, and the average answer was 7%[/year…

for “the” depreciation rate does not mean that you have any business using a 10%/year economy-wide depreciation rate in trying to assess how the net savings share would respond to increases in Piketty’s wealth-to-annual-net-income ratio.

Who are these London School of Economics economists who think that 7%/year is a reasonable depreciation rate for a wealth concept that attains a pre-World War I level of 7 times a year’s net national income? I cannot imagine any of the LSE economists signing on to the claim that back before WWI capital consumption in northwest European economies was equal to 50% of net income–that depreciation was a third of gross economic product.

One more remark: if more than half LSE macroeconomists really do believe that net domestic product is 28% lower than gross domestic product—for that is what a depreciation rate of 7% per year gets you with an aggregate capital-output ratio of 4—then more than half of LSE macroeconomists need to be in a different profession. I don’t believe Krusell and Smith’s survey. I don’t believe their LSE colleagues told them what they claimed they had…

When “Globalization” is Public Enemy Number One

Globalization over the centuries

*Milken Institute Review: When Globalization is Public Enemy Number One: The first 30 years after World War II saw the recovery and reintegration of the world economy (the “Thirty Glorious Years,” in the words of French economist Jean Fourastié). Yet after a troubled decade — one in which oil shocks, inflation, near-depression and asset bubbles temporarily left us demoralized — the subsequent 23 years (1984-2007) of perky growth and stable prices were even more impressive as far as the growth of the world’s median income were concerned.

This period, dubbed the “Great Moderation,” was by most economists’ reckoning largely the consequence of the process of knitting the world together. The mechanism (and impact) was largely economic. But the consequences of globalization were also felt in cultural and political terms, accelerating the tides of change that have roughly tripled global output and lifted more than a billion people from poverty since 1990.

So why is globalization now widely viewed as the tool of the sorcerer’s apprentice? I am somewhat flummoxed by the fact that a process playing such an important role in giving the world the best two-thirds of a century ever has fallen out of favor. But I believe that most of the answer can be laid out in three steps:

  • The past 40 years have not been bad years, but they have been disappointing ones for the working and middle classes of what we now call the “Global North” (northwestern Europe, America north of the Rio Grande and Japan).
  • There is a prima facie not implausible argument linking those disappointing outcomes for blue-collar workers to ongoing globalization.
    * In any complicated policy debate that becomes politicized, the side that blames foreigners has a very powerful edge. Politicians have a strong incentive to pin it on people other than themselves or those who voted for them. The media, including the more fact-based media, tend to let elected officials set the agenda.

Hence it doesn’t take much of a crystal ball to foresee a few decades of backlash to globalization in our future. More of what is made will probably be consumed at home rather than linked into global supply chains. Businesses, ideas and people seeking to cross borders will face more daunting barriers.

Some of the consequences are predictable. The losses to income created by cross-border barriers to competition will grow. And more of the focus of economic policy will be on the division of the proverbial pie rather than how to make it larger. Small groups of well-organized winners will take income away from diffuse and unorganized groups of losers.

Measured in absolute numbers, an awful lot of wealth will be lost. But those losses won’t approach, say, the scale of the output foregone in the Great Recession. Figure on a 3 percent reduction in income, equivalent to the loss of two years’ worth of growth in the advanced industrialized economies.

Most well-educated Americans, I suspect, will either be net beneficiaries of the reshuffling of income or won’t lose enough to notice. Disruption often redounds to the benefit of the sophisticated who can see it coming in time to get out of the way or turn it to their own advantage. But that’s a minority of the population, even in rich countries. Real fear about where next week’s mac and cheese is going to come from applies for a tenth, while fear about survival through the hard times is still a thing for a quarter of humanity.

Why do I believe all this? Bear with me, for my explanation demands an excursion down the long and winding road of centuries of globalization.

Globalization in Historical Perspective: On the brilliant date-visualization website, Our World in Data, Oxford researcher Esteban Ortiz-Ospina, along with site founder Max Roser, has plotted best estimates of the relative international “trade intensity” of the world economy — the sum of exports and imports divided by total output over a very long time. In my reproduction I have divided the years since 1800 into four periods and drawn beginning- to end-of-period arrows for each.

The World in Data

In the years from 1800 to 1914, which I call the First Globalization, world trade intensity tripled, driven mostly by exchange between capital-rich, labor-intensive and resource-rich regions. Countries with both sorts of endowments benefit by specializing production in their areas of comparative advantage. Meanwhile, huge migrations of (primarily) people and (secondarily) financial capital to resource-rich regions established a truly integrated global economy for the first time in history.

The period from 1914 to 1945 saw a dramatic retreat, with the relative intensity of international trade slipping back to little more than its level in 1800. There are multiple, complementary explanations for this setback. Faster progress in mass production than in long-distance transport made it efficient to bring production back home to where the demand was. The Great Depression created a path of least political resistance in which governments sought to save jobs at home at the expense of trading partners. And wars both blocked trade and made governments leery of an economic structure in which they had to rely on others.

This retrenchment, however, was reversed after World War II. The years 1945 to 1985 saw the Second Globalization, which carried trade intensity well above its previous high tide in the years before World War I. But this time, the bulk of trade growth was not among resource-rich, capital-rich and labor-intensive economies exchanging the goods that were their comparative advantage in production. It largely took place within the rich Global North, as industrialized countries developed communities of engineering expertise that gave them powerful comparative advantages in relatively narrow slices of manufacturing production in everything from machine tools (Germany) to consumer electronics (Japan) to commercial aircraft (the United States).

After 1985, however, there was a marked shift to what Ortiz-Ospina calls “hyperglobalization.” Multinational corporations began building their international value chains across crazy quilts of countries. The Global South’s low wages gave it an opportunity to bid for the business of running the assembly lines for products designed and engineered in the Global North. Complementing this value-chain-fueled boost to world trade came the other aspects of hyperglobalization: a global market in entertainment that created the beginnings of a shared popular culture; a wave of mass international migration and the extension of northern financial markets to the Global South, cutting the cost of capital and increasing its volatility even as it facilitated portfolio diversification across continents.

Hyperglobalization, Up Close and Personal: Of these value-chain-fueled boosts to international trade, perhaps the first example was the U.S.-Mexico division of labor in the automobile industry enabled by the North American Free Trade Agreement of the early 1990s. The benefits were joined to the more standard comparative-advantage-based benefits of reduced trade barriers. At the 2017 Milken Institute Global Conference, Alejandro Ramírez Magaña, the founder of Cinépolis, the giant Mexican theater group that is investing heavily in the United States, summed up the views of nearly all the economists and business analysts in attendance:

Between the U.S. and Mexico, trade has grown by more than six-fold since 1994 … 6 million U.S. jobs depend on trade with Mexico. Of course, Mexico has also enormously benefited from trade with the U.S.… We are actually exporting very intelligently according to the relative comparative advantage of each country. Nafta has allowed us to strengthen the supply chains of North America, and strengthened the competitiveness of the region…

Focus on the reference to “supply chains”. Back in 1992, my friends on both the political right and left feared—really feared—that Nafta would kill the U.S. auto industry. Assembly-line labor in Hermosillo, Mexico had such an enormous cost advantage over assembly-line labor in Detroit or even Nashville that the bulk of automobile manufacturing labor and value added was, they claimed, destined to move to Mexico. There would be, in the words of 1992 presidential candidate Ross Perot, “a giant sucking sound,” as factories, jobs and prosperity decamped for Mexico.

But that did not happen. Only the most labor-intensive portions of automobile assembly moved to Mexico. And by moving those segments, GM, Ford and Chrysler found themselves in much more competitive positions vis-a-vis Toyota, Honda, Volkswagen and the other global giants.

Fear of Globalization: Barry Eichengreen, my colleague in the economics department at Berkeley, wrote that there is unlikely to be a second retreat from globalization:

U.S. business is deeply invested in globalization and would push back hard against anything the Trump administration did that seriously jeopardized Nafta or globalization more broadly. And other parts of the world remain committed to openness, even if they are concerned about managing openness in a way that benefits everyone and limits stability risks that openness creates…

But I see another retreat as more likely than not. For one thing, anti-globalization forces have expanded to include the populist right as well as the more familiar populist left. It was no surprise when primary contender Bernie Sanders struck a chord by condemning Nafta and the opening of mass trade with China as “the death blow for American manufacturing.” But it was quite another matter when the leading Republican candidate (and now president) claimed that globalization would leave “millions of our workers with nothing but poverty and heartache” and that Nafta was “the worst deal ever” for the United States.

The line of argument is clear enough. Globalization, at least in its current form, has greatly expanded trade. This has decimated good (high-paying) jobs for blue-collar workers, which has led to a socioeconomic crisis for America’s lower-middle class. U.S. Trade Representative Robert Lighthizer buys this:

Nafta has fundamentally failed many, many Americans. … [Trump] is not interested in a mere tweaking of a few provisions and a couple of updated chapters. … We need to ensure that the huge [bilateral trade] deficits do not continue, and we have balance and reciprocity…

It’s conceivable that the Trump administration will yet pay homage to the post-World War II Republican Party’s devotion to open trade. But it seems unlikely in light of the resonance protectionism has had with Trump supporters. And if the Trump administration proves not to be a bellwether on globalization, it is surely a weathervane.

When Globalization is Public Enemy Number One

The Real Impact of Globalization: Portions of the case against globalization have some traction. It is, indeed, the case that the share of employment in the sectors we think of as typically male and typically blue-collar has been on a long downward trend. Manufacturing, construction, mining, transportation and warehousing constituted nearly one-half of nonfarm employment way back in 1947. By 1972, the fraction had slipped to one-third, and it is just one-sixth today.

But consider what the graph does not show: the decline (from about 45 percent to 30 percent) in the share of these jobs from 1947 to 1980 was proceeding at a good clip before U.S. manufacturing faced any threat from foreigners. And the subsequent fall to about 23 percent by the mid-1990s took place without any “bad trade deals” in the picture. The narrative that blames declining blue-collar job opportunities on globalization does not fit the timing of what looks like a steady process over nearly three-quarters of the last century.

Wait, there’s a second disconnect. Look at the way the declines in output divide among the sub-sectors (see page 29). Manufacturing was about 15 percent of nonfarm production in the mid-1990s and was still about 14 percent at the end of 2000, even as trade with Mexico and China accelerated into hyperdrive. Indeed, the bulk of the fall in “men’s work” has been in construction, which represented 7 percent of private industry production in 1997 and represents just 4 percent today. Warehousing and transportation have also taken a big hit in terms of proportion.

The biggest factors on the real production side over the past 20 years have not been the out-migration of manufacturing, but the depression of 2007-10 and the dysfunction of the construction finance market that continues to this day.

The China Shock: The case that the workings of globalization have had a major destructive effect on the employment opportunities of blue-collar men over the past two decades received a major intellectual boost from the research of David Autor, David Dorn and Gordon Hanson on the impact of the “China shock.”

One of their bottom lines is that the loss of some 2.4 million American manufacturing jobs “would have been averted without further increases in Chinese import competition after 1999.” Moreover, the effects on workers and their communities were dislocating in a way in which manufacturing job loss generated by incremental improvements in productivity not associated with factory closings was not.

The China shock was very real and very large: its significance shouldn’t be discounted, especially in the context of a close presidential election whose outcome may have a large, enduring impact on the United States — and, for that matter, the world. But some perspective is needed if one is to allow the tale of the China shock to influence thinking about globalization.

Start with the fact that, in most ways, this is a familiar story in the American economy that long preceded the rise of China. Dislocation associated with the relocation of production facilities is more damaging to people and places than incremental changes in production processes, whether the movement is across state lines or across continents.

When my grandfather and his brothers closed down the Lord Bros. Tannery in Brockton, Massachusetts to reopen in lower-wage South Paris, Maine, the move was a disaster for the workers and the community of Brockton — and a major boost for South Paris. When, a decade and a half later, my grandfather found he could not make a go of it in South Paris and started a new business in Lakeland, Florida, it was the workers and the community of South Paris who suffered.

The fact that, in the case of globalization-driven dislocation, the jobs cross international borders adds some wrinkles, but not all of them are obvious. As demand shifts, jobs vanish for some in some locations and open for others in other locations. Dollars that in the past were spent purchasing manufactures from Wisconsin and Illinois and are now spent purchasing manufactured imports from China do not vanish from the circular flow of economic activity. The dollars received by the Chinese still exist and have value to their owners only when they are used to buy American-made goods and services.

Demand shifts, yes — but the dollars paid to Chinese manufacturing companies eventually reappear as financing for, say, new apartment buildings in California or to pay for a visit to a dude ranch in Montana or even to buy an American business that otherwise might close. GE, which had been openly seeking a way to offload its household appliance division for many years, sold the business to the Chinese firm Haier, the largest maker of appliances in the world. How different might the world have been for the employees of White-Westinghouse who were making appliances if a Chinese firm had been trolling the waters for an acquisition before the brand disappeared for good in 2006?

Only with the coming of the Great Recession do we see not blue-collar job churn but net blue-collar job loss in America. And that was due to the government’s failure to properly regulate finance to head off the housing meltdown, the subsequent failure to properly intervene in financial markets to prevent depression, and the still later failure to pursue policies to rapidly repair the damage.

All that said, the connection between the China shock in the 2000s and increasing blue-collar distress in the 2000s on its face lends some plausibility to the idea that globalization bears responsibility for most of their distress, and needs to be stopped.

The Globalization Balance Sheet: Last winter, in a piece for, I made my own rough assessment of the factors responsible for the 28 percentage point decline in the share of sectors primarily employing blue-collar men since 1947. I attributed just 0.1 percentage points to our “trade deals,” 0.3 points to changing patterns of trade in recent years (primarily the rise of China), 2 percentage points to the impact of dysfunctional fiscal and monetary policies on trade, and 4.5 percent to the recovery of the North Atlantic and Japanese economies from the devastation of World War II. I attributed the remaining 21 percentage points to labor-saving technological change.

This 21 percentage points has very little to do with globalization. Yes, with low barriers to trade, technology allows foreign exporters to make better stuff at lower cost. But American producers have the parallel option to sell them better stuff for less. And thanks to technology, consumers on both sides get more good stuff cheap. Economists slaving away in musty offices can invent scenarios in which technological change favors foreign producers over their American counterparts and thereby directly costs blue-collar jobs. But the assumptions needed to get that result are highly unrealistic.

To repeat, because it bears repeating: globalization in general and the rise of the Chinese export economy have cost some blue-collar jobs for Americans. But globalization has had only a minor impact on the long decline in the portion of the economy that makes use of high-paying blue-collar labor traditionally associated with men.

Why is this View so Hard to Sell?: Pascal Lamy, the former head of the World Trade Organization, likes to quote China’s sixth Buddhist patriarch: “When the wise man points at the moon, the fool looks at the finger.” Market capitalism, he says, is the moon. Globalization is the finger.

In a market economy, the only rights universally assured by law are property rights, and your property rights are only worth something if they give you control of resources (capital, land, etc.) — and not just any resources, but scarce resources that others are willing to pay for. Yet most people living in market economies believe their rights extend far beyond their property rights.

The way mid-20th century sociologist Karl Polanyi put it, people believe that they have rights to land whether they own the land or not — that the preservation and stability of their community is their right. People believe that they have rights to the fruits of labor — that if they work hard and play by the rules they should be able to reach the standard of living they expected. People believe that they have rights to a stable financial order — that their employers and jobs should not suddenly disappear because financial flows have been withdrawn at the behest of the sinister gnomes of Zurich or some other tribe of rootless cosmopolites.

Dealing with these hard to define, sometimes conflicting claims to rights beyond property is one of the major political-rhetorical-economic challenges of every society that is not stagnant. And blaming globalization for the unfulfilled claims of this group or that is a very handy way to pass the buck.

The good news is that, whatever the merits of the grievances of those who see themselves as losers in a globalizing economy, sensible public policy could go a long way to making them whole. Three keys would open the lock:

  • The failure of regional markets to sustain good jobs could be managed by much more aggressive social-insurance — unemployment, moving allowances, retraining and the like — along with the redistribution of government resources to create jobs where they have been lost.
  • More aggressive fiscal measures to keep job markets tight.
  • Karl Polanyi’s key remains at hand, too. While many Americans claim to worship at the altar of free markets, they still believe that they have all kinds of extra socioeconomic rights — to healthy communities, to stable occupations, to appropriate and rising incomes — that are not backed up by property rights. Governments could intervene on their behalf.

That way lies tyranny, we’ve been told, but also very high-functioning social democracies like Sweden, Germany and the Netherlands.

The bad news, of course, is that the public policies needed to soothe the grievances blamed on globalization seem further out of reach today than they were decades ago. Probably the best one can hope for is that the fever subsides sufficiently to allow for a realistic debate over who owes what to whom.

Determining Bargaining Power in the Platform Economy: Reinvent Full Transcript

Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster…

…The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.

Fixes for the economy?:

  • A 4 percent inflation target from the Federal Reserve, * Incentivizing businesses to invest in workers,
  • Reinvigorating the idea that technology should be used to augment workers, not replace them.

The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.

Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore…says…

Full Transcript:

Pete Leyden: Hello. I’m Pete Leyden. Today, we have Brad DeLong with us. He is an economics professor here at U.C. Berkeley. He’s also the recently installed chief economist of the Blum Center for Developing Economy.

Pete Leyden: It’s good to have you here.

Brad DeLong: Great to be here.

Pete Leyden: We’re here at this moment with all these folks from the OECD, the economists from the United States here, and the technologists. If you had to think about the kind of moment we’re in right now, how would you characterize where we are as far as the evolution of the global economy and our technologies are? Is there anything special about this moment? Anything critical about it? Any ways you think about this juncture?

Brad DeLong: Let me give you a three-part answer to that: a 50-year horizon answer, a 15-year horizon answer, and then a 0-5-year horizon answer.

Brad DeLong: The 0-5-year horizon answer is: America has been deeply scarred by the financial crisis that started in 2007, the deep recession that followed, and the extraordinarily anemic recovery since. That still leaves us with four million people fewer in the labor force and looking for jobs than we ought to have. We are not sure what all of them are doing. Many are living in their sisters’ basements playing video games. The economy and people’s expectations of how it works have been shocked. How well our society functions is still deeply scarred. We are recovering only slowly, if at all, back to what we used to think was normal. that is the 0-5-year horizon answer.

Brad DeLong: The 50-year horizon answer is: Expect the collapse of the need for people to do a great many tasks that people used to do and are still doing that provide value. In the next 50 years an awful lot of paper-shuffling tasks are going to be taken over by software bots. An awful lot of blue-caller, traditionally male, tasks are going to be taken over by robots. Few occupations will disappear. But many occupations will be transformed. And many will shrink. The income and wealth distribution will be upset—either in a positive or a negative direction. These 50-year horizon processes are what most of us upstairs at this conference are worrying about.

Brad DeLong: Then there’s a 10- to 15-year horizon. How much of this transformation is going to happen in the next 15 years, as opposed to the rest of the next 50? How fast is the 50-year horizon process going to come upon us? Where exactly will be the first sectors and first places in which the coming of—call it the “Rise of the Machines”—the replacement not just of blue-color manufacturing but also construction and transportation and distribution and warehouse workers will be hit by technology, and who? Where and when will a good deal of standard white-color paper-shuffling work start to disappear as expert systems and software bots take it over?

Pete Leyden: In your career, is this about as momentous a time as you’ve seen? Or is that overhyping it?

Brad DeLong: That we are recovering from the macroeconomic catastrophe that started in 2007 has definitely made it very, very fraught. The failure of our Electoral College to deliver us a competent president in 2016 has definitely made it very, very fraught. Our political system was hacked partially by malevolent people, but mostly by time, circumstance, chaos, and disaster. It has been hacked in three ways.

Brad DeLong: The first way it has been hacked is the Electoral College failure; that gave us a president who really is not up to the job in practically any dimension. The second way is that small states hacked the constitution in 1787, so today the 49-seat minority in the senate represents 175 million people, while the 51-seat majority represents 145 million people. The desperately minority congressional government understands it is a minority government. It is acting oddly as a result. Third, the state-level Republican gerrymandering after the 2010 censushas given us House of Representatives is extraordinarily unrepresentative of the median American voter. These have created a time of great political fraughtness. We clearly have a very badly broken political system. That greatly deepens and increased the dangers of managing what I call the 50-year transition. And on top of that is the economic fraughtness left from 2007.

Brad DeLong: The 50-year transition has been going on since Steve Jobs and Steve Wozniak began building personal computers in the garage. It has been going on at a more less constant pace. We see a little bit more about where it’s heading with each passing year. It really has not sped up much. What has made this moment fraught is the political disaster of 2016 and the echoing effects of the economic disaster of 2007.

Pete Leyden: There are three challenges we’ve been wrestling with here. You mentioned one of them—the robots and AI. But there’s this idea that the economy is moving towards more and more independent workers. There’s also this rise of the “platform economy”. How do you think of those other two challenges? How important developments are they? How much do they concern you—or actually encourage you as good thing?

Brad DeLong: The platform economy has a number of dimensions. One is what Hal Varian was talking about at the conference yesterday—the “end of the need for scale”. With Amazon Web Services and with Google anyone with a good idea can launch their website at scale for pennies, providing through the web whatever service or commodity they want to provide. And if demand is there they can scale up as far as they need to using very cheap world class-efficiency systems to support their businesses. You no longer need a large initial lump of capital of any. You just soft launch and look for demand. You use the web and search to attract customers. You use AWS and Google to provide your back end. This should be the cause of an enormous upward surge in entrepreneurship and enterprise, and a great flourishing of creativity. Whether it’s individuals with an extra four hours a week making extra money by driving for Lyft, or whether it’s writers saying, “I don’t want to have to sell books at 20 bucks and get only a $1.50 in royalties. I want to establish my own Patreon and have my fans pay me directly”, or any of a whole bunch of other things.

Brad DeLong: The possibilities for positive human flourishing from the platform economy are immense—if the platforms actually work. Right now we find ourselves in a world in which riders are paying essentially 60% of Uber’s costs. Uber’s investors are paying 40% of Uber’s costs. What happens when the investors begin wanting their money back? Do we find that Uber has enough economies of scale, and scope, and enough of a brand and a first mover advantage, that it’s a profitable business? Or do we find that the business gets taken over by somebody else? What if Google puts a little taxi ride button on every Google Map screen, saying: “We’ll only charge you a $1.50 as a handling fee”? Uber will have charge you considerably more if it wants to repay its investors. Uber may turn out to have done the trail-breaking thing. Uber may suffer the fate of most pioneers—arrows in their back, and face down. Or perhaps the platform economy will not be a good thing. Perhaps it moves bargaining power away from the real producers, who are doing the work, and also away from the customers, and into the hands of that one large company in the middle that controls the information. That’s still up for grabs.

Brad DeLong: Most people who fear that we are, as the extremely sharp Zeyneb Tufekci of Duke University says, “building a dystopia one brick at a time in order to trigger people to click on ads”, greatly fear that individual humans, given our cognitive disabilities, will be no match for the informational middleman organization using deep learning and information to figure out how to trigger and control us. Others are much more optimistic—although not necessarily much more optimistic about the prospects of individual platform pioneers like Uber. They are, however, more optimistic about the prospects of the large companies that have entrenched dominant positions: companies like Apple, Google, and Facebook—not that they are optimistic about any one of them, but rather they are optimistic about the prospects for profits for all of them put together, because what opportunities one of them fumbles another one is likely to recover.

Pete Leyden: They will do well for everybody, or do good for themselves?

Brad DeLong: They will well, and they will do good.

Pete Leyden: Do good. And where do you find that, actually?

Brad DeLong: I’m basically a techno-optimist. It’s hard not to be a techno-optimist in California—especially if you’re an intellectual, a data loving infovore.

Pete Leyden: You think even though there are all these challenges, the platform economy is something we could get behind?

Brad DeLong: Yes.

Pete Leyden: What about speaking as an economist now? This other thread: independent workers playing an increasing role in the economy. There’s a positive way to see that. There are also challenges in that. I’m curious to how you see that challenge.

Brad DeLong: Independent workers have, by their nature, very little bargaining power over what economists call “rents embedded in the system”. Your bargaining power is limited by what you could charge if you walked away from the relationship and went out on your own, and by what your counterparty would have to pay in order to get someone else to step up in your place. You have bargaining power if, when you walk, you disrupt a complex and valuable general production value chain, and your counterparts finds it expensive to figure out how to replace you. You have bargaining power even if there is someone else who could fill your job just as well if and only if it is difficult to find that person. A lot of successful middle-class societies have been based on situations in which relatively low-skill workers have bargaining power and share big time in economic rents, either because there aren’t that many replacements in the area or because they threaten to walk as a group.

Brad DeLong: Yesterday at the conference, ex-governor Jennifer Granholm of Michigan told a heartbreaking story about a town in central Michigan: 8,000 people, of whom 3,000 work edin the refrigerator plant. Those 3,000 workers made a very good living for Michigan at the start of the 2000s—some 35 buck an hour, I think, in wages and benefits. But the refrigerator plant goes. And after it leaves they are lucky to make $12 or $15 an hour. And then all those who worked to satisfy their demands find their markets have halved in value. The refrigerator plant workers’ skills, machines, lifetime of experience bashing metal and operating things that form refrigerator coils—there’s really not much demand for those skills in central Michigan, and they find that they can’t transfer their skills to do anything else of great value. The principal source of their income was sharing in the rents created by the refrigeration value chain: their dominant market positions and imbedded technology. That kind of danger faces a lot of people who become independent workers. And the middleman firm does not have to close. All the middleman firm has to do is say: “I am altering the deal. Pray I do not alter it any further”.

Brad DeLong: On the other hand, an independent worker economy is not bound to be destructive. As long as we have a middle-class society, these are immense amounts of work to be done for one another. And replacing any of us with somebody else will be expensive. Think of the typical job in the economy going from being a manufacturing worker to being a barista at a coffee shop or a teacher at a yoga studio. As long as you have a middle-class society, there’ll be a lot of people who will be willing to pay handsomely for yoga lessons or for a particular espresso beverage brewed exactly the way they like it with a smile, a handshake, and a friendly three-minute conversation about how they’re doing, while the thing brews.

Brad DeLong: On the other hand, if we have plutocracy, in which the only people who have a lot of money are the rich, then the potential customers for the yoga studio won’t be able to pay very much and your fancy expresso drink won’t command very much. The only people who’ll have middle-class lives will be those who control resources that are useful for making things for which rich people have a serious Jones. There’ll be relatively few of those as well. Thus most of it is the shape of what the income distribution will be. That is ultimately a political choice about the distribution of wealth. An unequal distribution of wealth will drive an unequal distribution of income. That will then reproduce itself. And an equal distribution of wealth will drive a more equal distribution of income, which will also reproduce itself.

Pete Leyden: You’ve kind of given—this is probably right that could go this way, could go that way, could be positive, could be negative—I get that and that’s good choices here but…

Brad DeLong: …This is why we economists want not to have just two hands, but a prehensile tail as well…

Pete Leyden: But in that respect, what do you see is the most promising ways forward to kind of deal with this juncture we’re in—tip the balance? What are the things that you’d like to see happen soon here that would evolve this economy in the direction to make it healthy?

Brad DeLong: Am I allowed to say a 4% inflation target from the Federal Reserve? A Federal Reserve that is less focused on keeping inflation very low, more focused on keeping employment high, and more focused on making sure that there’s enough inflation in the system that the Federal Reserve can maintain interest rates at a level at which it will have the power to stabilize the economy? Businesses are not going to want to train their workers unless workers are scarce. Workers tend to be scarce only in what we call a “high-pressure economy.” The first and most important thing would be to change the calculations of those businesses that might be willing to invest in training workers. They need to feel that workers are valuable commodities under their control that they need to boost the value of. It has been totally the case since 2008, and largely the case since 2001, that businesses think there are plenty of workers out there, and we really don’t care about them, because the bottlenecks keeping us from being more profitable are elsewhere. Making labor a serious bottleneck for business so that business focuses on helping workers become more productive and more useful is, I think, the first thing we could do.

Brad DeLong: The second thing would be to repeat what Silicone Valley did in the 1980s and 1990s, that is you’re old enough to remember the coming of the Macintosh computer in 1984…

Pete Leyden: …Indeed…

Brad DeLong: …Apple bought Super Bowl time for a dystopian 1984 TV commercial. It was all about how important the Macintosh computer would be as an engine of freedom. They really believed that the personal computer was an engine of freedom. It allowed you to control and access your own information, rather than having to rely on some human resource or IT department backed by some large mainframe that had lots of data that you weren’t allowed to access and controlled your life. The fear back then was that people would become information serfs: the valuable parts of the enterprise and the value chain would be kept under lock-and-key in the hands of the priests of IT and HR. It was a world in which people would take their draft cards and burn them, in which your information would come on five IBM cards which would all say, “Do not fold, spindle, or mutilate”, and which you would feed into the machine face down, nine-edge first. The vibe was that those cards produced decisions over which you had no control or knowledge. Thus making information technology tools to augment people’s abilities to figure out and maneuver in the world that they were in, rather than information technology being a tool for supervision and control—“you’re 15% less productive at processing claims, so we don’t need you around anymore, and you have no skills or information that can be transferred elsewhere.”

Brad DeLong: The idea of Apple Macintosh 1984 was of information technology as a way of augmenting human intelligence and boosting productivity—rather than information technology as a way that we can substitute capital for labor, and getting these annoying workers out of the factory or office while still producing as much. That was a key and a revolutionary social goal of Silicon Valley as it existed in the 1980s and 1990s, from the coming of the personal computer to the flourishing of the internet. In some sense, Silicon Valley has to figure out how to do this again. Organizations like, say, Berkeley’s engineering school have to help. Large companies tend to be much more interested in figuring out how to use information technology to shed annoying and expensive workers, rather than how to give those annoying and expensive workers more control over their lives.

Pete Leyden: Well, that’s fascinating. It’s a big challenge to the tech world as well as a challenge to policy makers. I wish we had more time to kind of go deeper into many, many possible solutions there. But just to wind up here, big challenges, possible big solutions shift, how confident are you that we’re going to manage this transition here? Whether it’s the five-year, the 15-year transition, how confident are you going to do it and how worried are you?

Brad DeLong: I would say I’m not confident at all.I would say that our income and wealth distribution now has managed to tilt itself in a bad way. If you want the economy to pay attention to you, you better have money. And the money is too concentrated now. If you want the polity to pay attention to you, you better have a movement. Yet somehow it seems that the age of the internet and of the decline of manufacturing has made it harder rather than easier to create durable social movements. At the same time it has made it much easier to create the appearance of a social movement via software bots controlled by some server in the Former Yugoslav Republic of Macedonia. And that crowds the information flow. What is the cartoon? “1980: my incandescent light bulb produces ten times as much heat as light. 2017: my LED light bulb has been taken over and is now running a button out of 50,000 Twitter followers controlled via a server on another continent.” That that seems to be the world we’re moving into. It’s not terribly a reassuring one.

Pete Leyden: Well, that’s a good place to end. At least that’s a sobering thought, and thanks so much for joining us here and giving us your thoughts.

Brad DeLong: You’re very welcome. It’s a great pleasure. Bring me back again.

Pete Leyden: I will.

Three Books for 2017: Economics for the Common Good, Janesville, Economism

3 books

Ken Murphy asked me for three books for 2017. Mine are: Amy Goldstein: Janesville: An American Story, Jean Tirole: Economics for the Common Good, and James Kwak: Economism: Bad Economics and the Rise of Inequality:

  • Amy Goldstein: Janesville: An American Story (9781501102233): The best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy…

  • Jean Tirole: Economics for the Common Good (9780691175164): A very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department…

  • James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): How a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters…

Amy Goldstein: Janesville: An American Story (9781501102233): This is the best of the very large and very uneven crop of ground-level books attempting to explain why those parts of America that are treading water or losing ground have been unable to adapt to changing technology and organization in the global economy. General Motors closed its Janesville plant in 2008 as it teetered on the edge of bankruptcy. Students began showing up at the local high school hungry and dirty. Teachers and others started social service organizations to supply them with supplies and food. Contributions to local charities fell off just when the need spiked. The closing of the GM plant triggered the closing of its nearby supplier plants as well.

The GM assembly-line workers had earned \$30 an hour at the plant. Some—a few—maintain their paychecks by becoming “birds of passage” working at still-open GM plants in other states. Others see their paychecks collapse: settle at jobs paying half as much, and with minimal benefits. For nobody was willing to pay anywhere near \$30 an hour for the skills and the energy of ex-GM workers. And the ex-workers could not use their skills and energy themselves to find a retraining path to anywhere near the pay levels that GM had offered them.

The big flaw, of course, is Amy Goldstein’s ignorance of and unwillingness to learn about the macro picture that makes the closing of the GM plant so devastating for Janesville. Plants, after all, close all the time because the money being spent on the products they had made is diverted to purchase other commodities made more efficiently that promote greater prosperity. Why weren’t the Janesville ex-workers able to benefit from spillovers from that greater efficiency and greater prosperity? Goldstein has no clue.

Jean Tirole: Economics for the Common Good (9780691175164): This is a very wise book on what high-quality economics is and is not, from the guy who was truly the smartest guy in the room back when I spent a year as a young lecturer in the MIT economics department. “The distinctive characteristic of academics”, Tirole writes, “their DNA, is doubt”. This creates a substantial tension: economists need to teach what they know not just to their peers and their students but to the public sphere; but the public sphere today—did it ever?—does not want nuanced arguments from two-handed economists. Cable TV and Twitter do not like to be told: “It is difficult to tell”. Yet, often, that is what Tirole has to say. Nevertheless, Tirole thinks—and I agree—that we have no alternative but to try: we must imagine Sisyphus happy.

In its thoughtful discussions of market-state interactions, boundaries, and synergies; in its focus on the government’s role not in prescribing actions but remedying information and other externalities; in its pleas for a diversified portfolio of institutional forms; in its speculations about the long-run impact of information and communications technology revolutions; in its use of the economics of information as an organizing principle; in its rich institutional detail; in its application of theory to real-world examples; and in its (much appreciated) boosterism for behavioral economics—this is the best book I read in 2017.

James Kwak: Economism: Bad Economics and the Rise of Inequality (9781101871195): This is a very good book about how a very large part of the economics profession has failed to get the true message of economics through its own biases and the political and ideological filters.

First of all, I think the book is mistitled. It is not economics that becomes a misleading and destructive ideological “-ism”. Rather, it is, as my friend Noah Smith puts it, it is Econ 101—supply and demand, and where the curves cross is always the bet place to be—that became a misleading and destructive ideological “-ism”.

Second, as James Kwak writes, Econ 101 became a misleading and destructive ideological “-ism” because it suited the interest of powerful groups with megaphones that it become so: neoclassical economics badly done via those who learned little economics simplistically applying the most basic supply-and-demand models. Our large upward leap in inequality, the financial crash, and the large holes in our safety net are some of the current flaws in America that Kwak traces to 101-ism. And he is in large part correct do so. 101-ism makes people think that whatever inequality there is in the current market is natural and just, and that government policies will always reduce wealth by generating Harberger triangles. And these are very convenient beliefs for plutocrats—not for plutocrats to hold them, but for those who pay rents to plutocrats to hold in order to make plutocrats richer.

Noah Smith hopes that empirical evidence will disrupt and dismantle 101-ism:

The economics discipline itself has been shifting from theory to data for years now, and the world is taking notice. Every time studies show that tax cuts don’t do much to encourage investment, or that the impact of minimum wage hikes is modest, the public loses a little faith in the power of traditional Econ 101. The cure… is more and better economics…. Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis…

I think Noah is wrong here: 101-ism provides a simple and powerful intellectual framework easily grasped that makes sense of a complicated world and also works to the advantage of people with a great deal of money who benefit from its spread. Thought is vulnerable to simplistic theories which then gain an unshakeable hold. Simplistic theories are easily propagated because they are, well, simplistic. When it is in the interest of someone with resources that others believe a doctrine, they will devote their resources to spreading it. And it is very difficult to convince somebody of anything when their pocketbook or their sense of self-worth depends on their thinking otherwise. 101-ism thus has powerful material and cognitive advantages over alternatives. And the only thing that the alternatives have going for them is that they are the truth.

I think that James Kwak is showing us here both how much and how little arguments based on the truth can do in the modern public sphere.

But, as I said in talking about Jean Tirole’s Economics for the Common Good: we must imagine Sisyphus happy…

Hoisted from the Archives: Night Thoughts on Dynamic Scoring

Should-Read: I say it is time to promote this guy to Admiral: AdmiralPAYGO!: Ed Lorenzen: @CaptainPAYGO on Twitter: “The Treasury Department dynamic ‘analysis’ of tax reform makes a mockery of dynamic analysis and does a disservice to those who advocate for serious dynamic estimates…”

Brad DeLong: @de1ong on Twitter: This is a surprise? Static analysis was always about making a bias-variance tradeoff: A static analysis would be biased, but have lower mean-squared error because the “dynamic” terms would inevitably be overwhelmingly large-magnitude political-partisan-lobbyist-ideologue noise:

Hoisted from the Archives from 2015: Night Thoughts on Dynamic Scoring: Live from DuPont Circle: Last Thursday two of the smartest participants at the Brookings Panel on Economic Activity conference—Martin Feldstein and Glenn Hubbard—claimed marvelous things from the enactment of JEB!’s proposed tax cuts and his regulatory reform program. They claimed:

  • that it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).

  • that it would leave the U.S. economy in ten years producing $840 billion more in annual GDP than in their baseline.

  • that over the next ten years faster growth would produce an average of 210 billion dollars a year of additional revenue to offset more than half of the 340 billion dollars a year ‘static’ revenue lost from the tax cuts

  • that the net cost to the Treasury would thus be not 340 but 130 billion dollars a year.

  • that in the tenth year—fiscal 2027—the 400 billion dollar ′static′ cost of the tax cuts would be outweighed by a 420 billion dollar faster-growth revenue gain.

The problem is that if I were doing the numbers I would reverse the sign…

I would say that:

  • On net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways
    witness the subprime boom and the financial crisis.
  • The incentive effects would tend to push up growth by only 0.1%/year
  • That would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed:
    • If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
    • If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
    • If they were financed by cutting government programs, there might be a small boost to growth–0.1%/year–but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.

And there is substantial evidence that I am right:

  • You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.
  • You cannot find a drag on growth from the Obama tax increases.
  • You can find an effect of the Clinton tax increases—but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.
  • Over the past thirty years, the agencies that do the government’s accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do—policies do affect growth rates. But is overestimating growth effects in a way that pleases one’s political masters a less-wrong thing? There is a bias-variance tradeoff here.

[Name Redacted] suggested at the conference that the right thing to do is probably to apply a substantial haircut to the growth-boost claims of political appointees.

The problem is that when I look at the example of ‘dynamic scoring’ that was on the table at Brookings—the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag—the haircut I come up with, for Republican policy proposals at least, is 112.5%.

Yet the near-consensus of the meeting was that dynamic scoring—done properly—was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do. If there were to be a day on which the news flow was less favorable to such a consensus conclusion, I do not know what that day would have looked like.
Twenty-two years and one month ago, after an OEOB meeting I spent carrying spears for David Cutler in one of his hopeless attempts to warn certain Assistant to the President for Health Policy precisely what reception his policy proposals would get from a CBO where Doug Elmendorf piloted the health-care desk, I returned to my office at the Treasury, and one of our career economists lectured me thus about dynamic scoring:

Brad, you people come in with your exaggerated belief in the productivity benefits of public investment. And so you command us to score your policies as having a very favorable impact on the deficit. They come in with their exaggerated belief in the benefits of tax cuts. They command us to score their policies as having a very favorable impact. We cannot say we disagree with our bosses’ analytic judgments. But by holding the line and stating that we do not consider any macroeconomic effects of policies, we can at least prevent being whipsawed by this partisan rosy-scenario ratchet.

Thus I find myself worrying about this:

  • I find myself thinking of CBO Directors past and future.
  • I think of June O’Neill, talking over and over again about how her model showed substantial disemployment effects of universal health coverage, without ever letting past her lips any acknowledgement that the people whose jobs her model showed as ‘destroyed’ had in fact voted with their feet and moved to a higher utility level by quitting.
  • I find myself thinking of the persistent rumors that after Doug Elmendorf and company had wreaked their analytic wrath on Ira Magaziner, Majority Leader Mitchell had said to Bob Reischauer: ‘You are gone on January 4, 1995’.

One unintended side effect of the budget process introduced in the 1970s and the 1980s has been to give CBO and JCT great power—has given their analytic decisions the importance of the unanimous coordinated votes of twenty senators over and above the impact of their estimates on members’ minds. They have by and large shouldered that great power with great responsibility. But with great power also comes great pressure. And it is not at all clear to me that, given the magnitude of this pressure, we want extra degrees of freedom in which these organizations can respond to the pressures they are under.

Yesterday, after all, I saw estimates of the dynamic revenue impact of Jeb!’s tax proposals that varied from negative—that the reduction in national savings would outweigh any positive incentive effects—to recouping 2/3 of the static revenue loss. And I imminently expect to see an ‘estimate’ today that it will produce 4%/year real growth and thus raise revenue–perhaps from someone at Heritage, perhaps from someone at Cato, perhaps from John Cochrane. It’s opening a can of worms. Doug and Peter may think the worms are dead. I fear they are not…

Doug Elmendorf wrote:

Based on my experience as the director of CBO from January 2009 through March 2015, the principal concerns expressed about estimated macroeconomic effects of proposals apply with equal force to other aspects of budget estimates or can be addressed by CBO and JCT. In my view, including macroeconomic effects in budget estimates for certain legislative proposals would improve the accuracy of those estimates and would provide important information about the economic effects of those proposals. Moreover, if certain key conditions were satisfied, those estimates would meet the general goals of the estimating process that estimates be understandable and resistant to misinterpretation, based on a consistent and credible methodology, produced quickly enough to serve the legislative process, and prepared using the resources available to CBO and JCT.

Doug has it wrong: they do not apply “with equal force”. As we have seen today, Monday, December 11, 2017, with the Treasury tax “reform” “study”.

The Page Which All Discussion of the Trumpublican Tax… “Reform”? “Cut”? “Giveway”? Should Start from…

Information from the very sharp Eric Toder: The House Ways and Means Tax Bill Would Raise the National Debt to 123 percent of GDP by 2037: “The Tax Policy Center estimates that the House Ways and Means Committee’s version of the Tax Cut and Jobs Act (TCJA)…

…over the first decade… increases the deficit by $1.7 trillion…. Between 2028 and 2037, the TCJA would reduce net receipts by $1.6 trillion and add $920 billion in additional interest costs. Over the entire 20-year period, the combination of reduced revenues and higher interest payments would raise the federal debt held by the public by $4.2 trillion…

This is based on:

the baseline economic and budget estimates in the Congressional Budget Office’s (CBO) March, 2017 long-term and June, 2017 updated 10-year budget projections…

But, of course, if the Trumpublican plan is passed, the best forecast of how the economy would evolve would not be the baseline CBO spring 2017 projections, but would be different. How different, and in which direction?

The best way to explain what professional economists think is to follow turn-of-the-twentieth-century British economist Alfred Marshall and divided the analysis up into four “runs”, each of which corresponds to a different forecast horizon, and in each of which the dominant economic factors at work are different. Call these the “short run”, “medium run”, “long run”, and “very long run”. And be aware that this separation is a heuristic device to aid in understanding. In the real world, all of the factors are operating all at once over time, so that even in the “short run” it is the case that “long run” factors will have a (small) influence. Moreover, the “runs” do not always come in sequence: sometimes the “long run” is right now.

With that caveat, the “runs” are:

  1. The “short run”, usually of zero to four years. In the short run, the economy is not or is not necessarily at “full employment”. Production can be below or above the current value of its sustainable productive potential, and changes in policy can either kick spending down (in which case production falls, unemployment rises, and inflation slows), or kick spending up (in which case production rises, unemployment falls, and inflation speeds up). Over the short run these effects of policy changes on the level of production, employment, and inflation are the dominant impacts.

  2. The “medium run”, usually of one to fifteen years, in which price levels and standard policy reactions have had time to adjust and so match production to the economy’s sustainable potential and match inflation to its generally-expected value, but in which there has not yet been time for stocks of productive resources to substantially adjust to policies. Over this medium run, the dominant effects of policy changes are on the division of production and spending between consumption, investment, government purchases, and net exports, plus the concomitant effect of those shifts in the distribution of production on the medium-run rate of economic growth.

  3. The “long run”, typically of ten to thirty years, in which stocks of productive resources have adjusted to changed incentives. Price levels and standard policy reactions have adjusted and matched production to potential and inflation to expectations. Adjustment has taken place so that government budget and international balance conditions are no longer out of whack with unsustainable deficits or surpluses. Shifts in the distribution of production have raised or lowered relative resource stocks so that they are no longer changing relative to the economy. s a result, in the long run the value of the economy’s productive potential has jumped up or down relative to its previous baseline growth path.

  4. The “very long run”, in which demographic and technological change factors that determine not jumps up or down in the level of sustainable productive capacity but rather the evolution of the economy over generations.

What are the likely effects of the Trumpublican plan, if implemented, in these four “runs”?

First, there is no short run argument that the bigger government deficits produced by Trumpublican plan will boost the economy. In order for a plan that increases deficits to boost the economy, three things would have to all be true:

  1. The larger deficits must either generate more purchases of goods and services directly—by the government buying more stuff—or get more purchasing power into the hands of people who have a high propensity to spend extra cash because they feel short of cash. The Trumpublican plan gets many into the hands of the rich, who do not feel short of cash.

  2. Production in the economy must be low relative to sustainable potential, so that extra spending actually does put workers without jobs to work in factories currency standing idle. Right now it looks as though the economy is close to if not at its sustainable potential—but there is an ongoing debate about that.

  3. The Federal Reserve must believe that production in the economy is low relative to sustainable potential. It must, then, be willing to cry “Havoc!”, and let slip the dogs of a higher-pressure economy. Right now the Federal Reserve is certain that the economy is very near to if not at “full employment”, and will respond quickly and thoroughly by raising interest rates in order to keep spending on the path it currently envisions.

All of (1), (2), and (3) would have to be true together for there to be a correct argument that the Trumpublican plan would boost economic growth in the short run. (1) and (3) are certainly false. (2) is probably false.

We can, in this case, neglect the short run analysis. It is not there in this case.

Nevertheless, if it were there—if (1), (2), and (3) were true or were to become true—a tax cut would boost production. This short-run argument is completely standard. I see it, for example, on page 319 of my copy of N. Gregory Mankiw: Macroeconomics (9th edition)

Mankiw Short Run Tax Cut

Second, the medium run argument is that the Trumpublican tax ct for the rich will not boost but rather be a drag on the economy. It raises the budget deficit by about 0.7% of GDP. That means that private savings that would have gone to finance private investment spending are diverted to the government instead. That deficit increase shifts about 0.5%-points of production out of investment spending, decreases net exports by about 0.2%-points of production, and raises consumption—elite, upper-class consumption, for the rich are the ones to whom the money is flowing—by 0.7%-points of production.

This medium-run argument is completely standard. I see it, for example, on page 74 of my copy of N. Gregory Mankiw: Macroeconomics (9th edition)

Mankiw A Tax Cut

The 0.5%-point fall in investment in America will slow economic growth by about 0.05%-point per year: we would lose 10 billion dollars a year of economic growth each year over the next ten years. That would leave real production in a decade some 100 billion dollars a year less—about 1000 dollars a year less per family—than in the baseline forecast. In an economy current currently producing 20 trillion dollars worth of goods and services a year, that would not not an economy-shattering deal. But 1000 dollars a year less in income per family—0.5% lower real production in a decade—would hurt: it would be a poke in the eye with a sharp stick.

Third, the long run argument is that the Trumpublican plan could boost the economy by inducing more investment. It cuts taxes on profits from passive investments, making investing in them more, well, profitable. Thus money should flow in, and some of that money will be used to build buildings and install machines to make workers more productive. This could happen: the right assessment of this argument is “it depends”. For one thing, in the long run the plan is simply one part of the change in the economy and in incentives that the Trumpublican plan will set in motion. The government budget must add up properly in the long run, and so in any long run analysis the tax cuts for the rich must be balanced either now or in the future by spending cuts or tax increases for the non-rich, and those would have their own effects on incentives and thus on productivity. For another thing, who would the increased profits flow to, and who would benefit from increased productivity?

It is possible to roughly and approximately sketch out this long run argument in another standard framework, set out by Paul Krugman in Leprechaun Economics, With Numbers. Assume that we start with an economy with (as the U.S. economy has) 150 million workers, producing 20 trillion dollars of national income each year with the assistance of 80 trillion dollars of capital. Assume further that the pre-corporate-tax rate of return on capital is some 10.0% per year. With a corporate tax rate of 35%, that would give us an after-tax rate of return on capital of 6.5% per year.

Now cut the corporate tax rate to 20%. That would give us an after-tax rate of return on capital of 8% per year if investment and thus the capital stock were to not rise in response to this increase in profitability. But in the long run investment and the capital stock would rise. By how much? Three considerations appear dominant:

  1. Domestic savings are simply not responsive to rates of return. Lots of economists have looked at the question, hoping to find that increases in profitability call forth increases in domestic savings and thus in investment. They haven’t found much.

  2. The U.S. is a huge chunk of the world economy. Figure that changes in after-tax rates of return in the United States drag the required rate of return in the rest of the world up or down in its wake by about 1/3 as much.

  3. International capital does chase higher rates of return. But investors in other countries have a limited desire to commit their wealth far away: there is “home bias”. Figure that half of the gap between changes in rest-of-the-world and U.S. returns is closed by international flows of investment.

Take these three considerations into account, and figure that in the long run the after-tax rate of return would fall by about 1/3 of the initial gap between the 6.5% rate before the tax cut and the 8.0% rate after the tax cut. So foreign investment would flow into the United States and push up the capital stock and productivity until the after-tax rate of return were 7.5%—which means that in the long run the pre-tax rate of return on capital would fall to 9.3% from 10%, a proportional decline of 1/14.

As a rule of thumb, to reduce the rate of return on capital by 1/14 requires an increase in the capital stock of 1/14. But only about half total valued capital is machines and buildings: the rest is market power and market position, intellectual property, and other economic quasi-rents. With 40 trillion dollars of machines and buildings, a 1/14 increase is about 3 trillion additional dollars worth of investment and capital.

That extra 3 trillion of capital would boost total annual production by about 300 billion dollars. Of that 300 billion dollars, 225 billion would flow to the foreigners who provided the investment, leaving a 75 billion dollar boost to Americans’ national income—an 0.35% boost. I would be inclined to then double that number: there are valuable benefits to having more investment and more capital, as workers successfully bargain for a share of economic rents created and as more investment strengthens and makes more productive our communities of engineering practice. If I were working for the CEA or the Treasury, I would be comfortable claiming an 0.7% boost in the long run to national income from this tax cut as long as the other changes in policy that made the government’s accounts add up were something (like, say, a carbon tax) that did not impose their own drag on economic growth and well-being (as, say, spending cuts would.

But the medium run effects would still be there in the long run. We would thus have a -0.5% from the medium run; an +0.7% from the long run; and whatever costs would be imposed on the economy by government-budget-adding-up. That looks like a wash to me.

And, fourth, the very long run effects? Those are highly speculative: nobody is confident that they have the right approach to modeling those. I tend to be on the side of those who believe that making the American distribution of income more unequal is harmful to entrepreneurship, enterprise, and growth. A richer superrich are a more politically powerful superrich. Economic growth comes from creative destruction. And in creative destruction it is the current superrich who are creatively destroyed—and thus they use their power and influence to try to block beneficial change. But such arguments are not ones you can take home.

That is the economic analysis of the Trumpublican plan, in basic and approximate form. Everybody serious and professional who is doing an analysis winds up with these pieces:

  1. A short run near-zero negligible effect.
  2. A medium run drag on the economy from higher deficits the cumulates to around 0.5% of national income.
  3. A possible—but far from certain and maybe not even likely—boost to national income (if there is no drag from the other, currently unspecified policy shifts that arrive with the Trumpublican plan in the long run) of about the same magnitude.
  4. Very long run effects that we do not have a handle on.

If anyone tries to sell you estimates of the impact that differ very much—by orders of magnitude—from those I have just given above, there is something wrong with their model and their analysis. Politely, it is “non-standard”. Impolitely…

Plus, of course: it would be a tax cut for the rich—and by the fact that things add up, a tax increase on and a reduction in useful government services flowing to the nonrich. How big would these effects be? We have estimates from the Center on Budget and Policy Priorities:


Chye-Ching Huang, Guillermo Herrera, and Brendan Duke: The Bill’s Impact in 2027: “By 2027… the JCT tables show…

…The highest-income groups would still get the largest tax cuts as a share of after-tax income. Millionaires, for example, would see a 0.6 percent ($16,810) increase… the bill’s permanent corporate tax cuts would primarily flow to wealthy investors and highly paid CEOs and other executives.

Every income group below $75,000 would face tax increases, on average. For example, households between $40,000 and $50,000 would see a 0.6 percent ($310) decline in their after-tax incomes. Many millions more families would face a tax increase in 2027 than in 2025 due to the expiration of such provisions as the increases in the Child Tax Credit and standard deduction. Further, the effect of the chained CPI would grow over time as it would fall further and further behind the tax code’s current measure of inflation…

And the CBPP has a very good track record on these matters.

Time for Me to Take Another Look at Nancy MacLean’s “Democracy in Chains”!



Should-Read: Nancy MacLean: DEMOCRACY IN CHAINS: THE DEEP HISTORY OF THE RADICAL RIGHT’S STEALTH PLAN FOR AMERICA “As 1956 drew to a close, Colgate Whitehead Darden Jr., the president of the University of Virginia, feared…

…second Brown v. Board of Education ruling, calling for the dismantling of segregation in public schools with “all deliberate speed.” In Virginia, outraged state officials responded with legislation to force the closure of any school that planned to comply…. Darden… could barely stand to contemplate the damage…. Even the name of this plan, “massive resistance,” made his gentlemanly Virginia sound like Mississippi. On his desk was a proposal, written by the… chair of the economics department… James McGill Buchanan [who] liked to call himself a Tennessee country boy. But Darden knew better….

Without mentioning the crisis at hand, Buchanan’s proposal put in writing what Darden was thinking: Virginia needed to find a better way to deal with the incursion on states’ rights represented by Brown. To most Americans living in the North, Brown was a ruling to end segregated schools—nothing more, nothing less. And Virginia’s response was about race. But to men like Darden and Buchanan, two well-educated sons of the South who were deeply committed to its model of political economy, Brown boded a sea change on much more…. Federal courts could no longer be counted on to defer reflexively to states’ rights…. The high court would be more willing to intervene when presented with compelling evidence that a state action was in violation of the Fourteenth Amendment’s guarantee of “equal protection”…. States’ rights… were yielding in preeminence to individual rights. It was not difficult for either Darden or Buchanan to imagine how [the Warren] court might now rule if presented with evidence of the state of Virginia’s archaic labor relations, its measures to suppress voting, or its efforts to buttress the power of reactionary rural whites by underrepresenting the moderate voters of the cities and suburbs of Northern Virginia. Federal meddling could rise to levels once unimaginable.

James McGill Buchanan was not a member of the Virginia elite. Nor is there any explicit evidence to suggest that for a white southerner of his day, he was uniquely racist or insensitive to the concept of equal treatment. And yet, somehow, all he saw in the Brown decision was coercion. And not just in the abstract. What the court ruling represented to him was personal. Northern liberals… who looked down upon southern whites like him,… were now going to tell his people how to run their society. And… he and people like him with property were no doubt going to be taxed more…. What about his rights? Where did the federal government get the authority to engineer society to its liking and then send him and those like him the bill? Who represented their interests in all of this?

I can fight this, he concluded. I want to fight this. Find the resources, he proposed to Darden, for me to create a new center on the campus of the University of Virginia, and I will use this center to create a new school of political economy and social philosophy… an academic center… with a… political agenda: to defeat the “perverted form” of liberalism that sought to destroy their way of life, “a social order,” as he described it, “built on individual liberty,” a term with its own coded meaning but one that Darden surely understood. The center, Buchanan promised, would train “a line of new thinkers” in how to argue against those seeking to impose an “increasing role of government in economic and social life.” He could win this war, and he would do it with ideas.

While it is hard for most of us today to imagine how Buchanan or Darden or any other reasonable, rational human being saw the racially segregated Virginia of the 1950s as a society built on “the rights of the individual,” no matter how that term was defined, it is not hard to see why the Brown decision created a sense of grave risk among those who did. Buchanan fully understood the scale of the challenge he was undertaking and promised no immediate results. But he made clear that he would devote himself passionately to this cause.

Some may argue that while Darden fulfilled his part—he found the money to establish this center—he never got much in return. Buchanan’s team had no discernible success in decreasing the federal government’s pressure on the South all the way through the 1960s and ’70s. But take a longer view… a different picture… a testament to Buchanan’s intellectual powers and… the ideological origins of the single most powerful and least understood threat to democracy today: the attempt by the billionaire-backed radical right to undo democratic governance…. A quest that began as a quiet attempt to prevent the state of Virginia from having to meet national democratic standards of fair treatment and equal protection… would, some sixty years later, become… a stealth bid to reverse-engineer all of America, at both the state and the national levels, back to the political economy and oligarchic governance of midcentury Virginia, minus the segregation…

Must-Read That’s it. I’m calling this one for Nancy MacLean in Nancy MacLean versus the critics of her book Democracy in Chains on the rise of right-wing Public Choice.

I think she gets a number of things wrong, but she gets the big thing about it right:

Steve Horwitz: MACLEAN ON NUTTER AND BUCHANAN ON UNIVERSAL EDUCATION: “Finding examples of misleading, incorrect, and outright butchered quotes and citations in Nancy MacLean’s new book…

…has become the academic version of Pokemon Go this week. I now offer one small contribution of my own…. Hardly enemies of democracy in the paper, Nutter and Buchanan see their task (as Buchanan did for his whole career) as offering analyses that could inform the deliberations of the democratic process…. MacLean sees this paper as an attempt by the two scholars to undermine public education in Virginia in order to keep the effects of pre-Brown segregation while still complying with the law….

They also never mention race in the paper, as she acknowledges, but their use of the technical language of economics and their race-neutrality is seen by her as evidence of their attempt to generate racist outcomes by stealth…. One might also note that supporting Brown also means that one is thwarting the desires of democratic majorities…. It’s fascinating that she sees the foundation of the arguments of democracy’s supposed opponents as a rejection of a Supreme Court decision that told local and state majorities that they couldn’t have the segregated schools they wanted…

Yep. That’s an extraordinary own goal by Horwitz: The true democracy is the Herrenvolk democracy…

Must-Read A propos of Nancy MacLean’s Democracy in Chains My view is that Brown v. Board of Education was not the major cause of James Buchanan’s decision to try to build and U VA President Colgate Darden’s decision to fund the “Virginia School of Political Economy”—Public Choice as a discipline that had only one wing, a right one, and that would, as the late Mancur Olson liked to say, “never be healthy until [or because?] its left wing was as strong as its right, and it was no longer an ideological movement masquerading as an academic sub discipline”.

But BvBoA was certainly a trigger, and support was always very welcome from those whose concerns about appropriate governmental decentralization, limited powers, and checks and balances started and ended with preserving white supremacy.

Noah Smith was on the case back in 2011:

Noah Smith (2011): NOAHPINION: THE LIBERTY OF LOCAL BULLIES: “I have not been surprised by any of the quotes that have recently come to light from Ron Paul’s racist newsletters. I grew up in Texas, remember…

Open Letter from 1,470 Economists on Immigration

Open Letter from 1,470 Economists (Including Me) on Immigration Dear Mr. President, Majority Leader McConnell, Minority Leader Schumer, Speaker Ryan, and Minority Leader Pelosi:

The undersigned economists represent a broad swath of political and economic views.

Among us are Republicans and Democrats alike. Some of us favor free markets while others have championed for a larger role for government in the economy. But on some issues there is near universal agreement. One such issue concerns the broad economic benefit that immigrants to this country bring.

As Congress and the Administration prepare to revisit our immigration laws, we write to express our broad consensus that immigration is one of America’s significant competitive advantages in the global economy. With the proper and necessary safeguards in place, immigration represents an opportunity rather than a threat to our economy and to American workers.

We view the benefits of immigration as myriad:

  • Immigration brings entrepreneurs who start new businesses that hire American workers.
  • Immigration brings young workers who help offset the large-scale retirement of baby boomers.
  • Immigration brings diverse skill sets that keep our workforce flexible, help companies grow, and increase the productivity of American workers.
  • Immigrants are far more likely to work in innovative, job-creating fields such as science, technology, engineering, and math that create life-improving products and drive economic growth.

Immigration undoubtedly has economic costs as well, particularly for Americans in certain industries and Americans with lower levels of educational attainment. But the benefits that immigration brings to society far outweigh their costs, and smart immigration policy could better maximize the benefits of immigration while reducing the costs.

We urge Congress to modernize our immigration system in a way that maximizes the opportunity immigration can bring, and reaffirms continuing the rich history of welcoming immigrants to the United States.

Fifteen Theses on “The Wealth of Humans” and “After Piketty”

Notes for the July 11, 2017 Research on Tap event:

  • Ryan Avent (2016): The Wealth of Humans: Work, Power, and Status in the Twenty-first Century
  • Heather Boushey, J. Bradford DeLong, and Marshall Steinbaum: After Piketty: The Agenda for Economics and Inequality

Meditations on Ryan Avent:

Ryan Avent: What will happen to ‘The Wealth of Humans’? “This really dramatic technological change… the digital revolution… is adding hugely to the amount of effective labor that’s available to firms…. A lot of routine tasks in factories and in offices… [to] be automated…. High-skilled jobs… use these new technologies to do work that used to require a lot more people to do and in the process are displacing workers… enormous, abundant labor…. Employer[s] with… huge reservoir[s] of willing workers at very low wages… say…. “I don’t need to invest in this labor-saving technology…. replace my cashiers with automated checkout… replace the people moving boxes in the warehouse with robots”. And so you get this sort of self-limiting technological change…. The more powerful the digital revolution… the more people… looking for low-wage work… the less of an interest firms have in using machines to replace them…”

  1. For the past thirty and the next thirty years—but probably not more—we are in all likelihood facing the increasing drift toward inequality driven by the rise of the Overclass as identified by Thomas Piketty. As long as the Overclass has enough control over the political system to manipulate it to reap enough rents to peg the rate of return on wealth—not physical capital, wealth—at 5%/year, we will see much if not all of the benefits from economic growth flowing to this Overclass, which will increasingly be an overclass of heirs and heiresses, rather than one that can claim that its wealth is due to some sort of meritocratic chops.

  2. For the past ten years and the next ten years—if not more—our biggest and principal problem has been an economy in secular stagnation afflicted by slack demand, and that in a high -pressure economy like we had under Clinton in the late 1990s or Kennedy-Johnson in the 1960s, most of what we see as our economic problems would not melt completely away but be much reduced. Robots and artificial intelligence were overwhelmingly seen not as problems but as opportunities in the high-pressure economy of the later 1990s.

  3. A generation ago we feared. But then we feared not the robot but the mainframe—and our fears of the mainframe then were like our fears of the robot now, save that while we now fear that robots will leave us with no work to do, we feared then that mainframes would leave us with no meaningful work to do and no work to do save being a mainframe-controlled dumb robot. As the Apple commercial said, we feared that 1984 would be like 1984: Those fears were vastly overblown: we did not become robots subordinated to mainframes; instead, microcomputers and the internet became our personal intelligent tools.

  4. The human brain is a massively parallel supercomputer that fits inside half a shoebox. It draws 50 watts of power. It is an amazing innovation, analysis, assessment and creation machine. 600 million years of proto-mammalian and mammalian evolution coupled with the genetic algorithm means that almost every single human can solve AI problems far beyond our current engineering reach—so much so that much of what our machines find impossible our brains find so trivially easy that we call such capabilities “unskilled”. When combined with our brains, human fingers are amazingly fine manipulation devices. And human back and leg muscles—especially when testosterone soaked—are quite good at moving heavy objects. Thus back in the environment of evolutionary adaptation, we used our brains, our big muscles, and our fingers to lead cognitively interesting—if stressful and short—lives.

  5. Back in the environment of evolutionary adaptation, we used our brains, our big muscles, and our fingers to lead cognitively interesting—if stressful and short—lives. Short: life expectancy at brith of 25 or so. Stressful: watching relatively young people die around you all the time is a significant source of stress. And in order for the average woman to have two children who survive to reproduce, the average woman would have had to have three reach adulthood, about four reach the age of five, about six live births, and about nine pregnancies—that’s the average. Up until 250 years ago, the average woman spent about six years pregnant and eighteen years breastfeeding. Some more. Some less.

  6. History has rolled forward since the hunter-gatherer age. And as history has rolled forward, we have figured out other things to do to add economic and sociological value than using our backs and legs to move things, our fingers to grasp things, and our brains to decide what to hunt and gather. Using backs to move heavy objects and our fingers to perform fine manipulations in cognitively-interesting ways has, relatively, declined.

  7. As our use of our backs and fingers guided by our brains to create value has declined, we have turned to: (1) turning many of us into robots ourselves, performing simple routinized repetitive and vastly boring tasks to fill in the gaps in value chains between the robots that we know how to build; (2) jobs as microcontrollers for domesticated animals and machines—the horse does not know what plowing the furrow is—(3) finding jobs as relatively simple accounting and software bots, keeping track of stuff, what it is useful for, and how its use is to be decided; (4) becoming personal servitors; (5) becoming social engineers—trying to keep all those things and all those people—especially, perhaps, trying to keep those brains soaked in testosterone—somehow working in harmony, somehow pulling together, although admittedly with limited success; and (6) remaining innovators, analyzers, assessors, and creators as well.

  8. Backs started to go out with the domestication of the horse. Fingers began to go out with the invention of the spinning jenny. But humans-as-microcontrollers, humans-as-accounting-‘bots—paper shufflers—and humans-as-the-robots we cannot yet build—took up all the job slack. Every horse needs a microcontroller. And a human brain was the only possible option. Even today, to a large amount every textile machine needs a human watching it at least part of the time. It doesn’t know when it’s gone wrong. It has no clue how to fix itself. It no more understands the idea of “fixing” any more than Alpha-Go understands that it is playing Go, and not just solving a problem of outputting a two-element vector in response to a 19 x 19 matrix of inputs with the additional structure that the output changes the matrix and that the possible matrices have a value-function structure.

  9. Now, however, we can finally peer into a future in which the microcontrollers and the accounting bots are on their way out in a manner analogous to the backs and the fingers. But this is our future. This is not our present. For the past ten years and the next ten years—if not more—our biggest and principal problem has been an economy in secular stagnation afflicted by slack demand, and that in a high -pressure economy like we had under Clinton in the late 1990s or Kennedy-Johnson in the 1960s, most of what we see as our economic problems would not melt completely away but be much reduced.

  10. What do we see when we peer into a future in which the microcontrollers and the accounting bots are on their way out in a manner analogous to the backs and the fingers? Fortunately, one thing this brings with it isthe forthcoming extinction of the the jobs that treat humans as simple robots: simple cogs in the machine that is Henry Ford’s River Rouge assembly line. Many occupations that vastly underutilize the massively parallel supercomputer that fits in half a shoebox are on the way out—and good: for those are not properly “human” jobs at all.

  11. Not yet, but starting soon, and continuing for perhaps the next hundred years, we face the deep problem of the obsolescence of human brains as resources that can be employed—or, rather, underemployed—to create substantial economic value. Over the past six thousand years, ever since the domestication of the horse, we have seen the erosion, at first slowly and in the past two centuries rapidly, of the obsolescence of human muscles as resources that can be employed to create substantial economic value. But we have benefited because human brains underemployed—as microcontrollers for domesticated animals and machines, and as relatively simple accounting and software bots—have nevertheless been of great and increasing value. But now our microcontrollers are better microcontrollers than human brains, and our software accounting ‘bots are becoming better accounting ‘bots than human brains. Not next year, and not next decade, but further out by some unknown time, humans’ jobs will be as: personal servitors, social engineers, and innovators, analyzers, assessors and creators. Here we might well, someday, have a huge problem.

  12. The market economy will amply fund AI research that replaces workers in capital intensive production processes by machines. Such industries have mammoth returns to scale. They thus tend to be characterized by large oligopolies. And so the firm that funds such labor-replacing research will capture with its own scale and in its own value chain a substantial part of the benefits of such R&D. That means that the combination of coming AI with a market economy might well be absolute poison for equity and equitable growth. It will race ahead with shedding workers in capital intensive production processes.

  13. The market economy will not amply fund AI research that assists and amplifies workers in labor intensive production processes. Such tend to be small scale. The inventors and the innovators cannot capture even a small part of the benefit in their own production processes and value chains. And intellectual property is a very weak reed indeed to rely on to fix the problem—in fact, intellectual property is more likely to be the problem than the solution, cf. Nathan Myhrvold, and Intellectual Ventures.

  14. The combination of coming AI with a market economy might well be absolute poison for equity and equitable growth. It will race ahead with shedding workers in capital intensive production processes. There will be—as Laura Tyson and Mike Spence pointed out in their contribution to Heather, Marshall, and my After Piketty book—a synergy between the dangers posed by the Rise of the Robots on the one hand and the inequality generating forces analyzed by Thomas Piketty in his Capital in the Twenty-First Century on the other.

  15. Technological progress could rescue us from Pikettyian dystopia. Robots could be intelligent tools. AI could be gold for equity: amplifying the capabilities of workers in labor intensive production processes would, as John Maynard Keynes once said, bring us vastly closer to economic El Dorado. Recall how a generation ago we feared not the robot but the mainframe—and our fears of the mainframe then were like our fears of the robot now, save that while we now fear that robots will leave us with no work to do, we feared then that mainframes would leave us with no meaningful work to do and no work to do save being a mainframe-controlled dumb robot. As the Apple commercial said, we feared that 1984 would be like 1984. But we are unlikely to see a repeat of the microcomputer revolution. Firms will not invest on a large scale in AI that amplifies the capabilities of labor in labor intensive industries. It will not happen unless some NGO does. How about an engineering school? How about an engineering school at a public university?

After Piketty: Capital in the Twenty-First Century, Three Years Later

Introduction to: After Piketty: The Research Program Starting from Thomas Piketty’s Capital in the Twenty-First Century

Thomas Piketty’s Capital in the Twenty-First Century is an astonishing, surprise bestseller.

Its enormous mass audience speaks to the urgency with which so many wish to hear about and participate in the political-economic conversation regarding this Second Gilded Age in which we in the Global North now find ourselves enmeshed.1 C21’s English-language translator Art Goldhammer reports (this volume) that there are now 2.2 million copies of the book scattered around the globe in 30 different languages. Those 2.2 million copies cannot and should not but have an impact. They ought to shift the spirit of the age into another, different channel: post-Piketty, the public-intellectual debate over inequality, economic policy, and equitable growth ought to focus differently. We have assembled our authors and edited their papers to highlight what we, at least, believe economists should study After Piketty as they use the book to trigger more of a focus on what is relevant and important.

Link to: After Piketty: The Agenda for Economics and Inequality